O Bubble, Where Art Thou?
#95: Revisiting the equity outlook.
It’s a stare-in-the-mirror moment.
Just four months ago, I penned After the Memes. The article argued that despite the strong stock market performance in 2023, there were few signs of over-indulgence. Even as indices approached new highs, the nonsense that typified the COVID stock bubble was notably absent. I concluded that “a ‘bubble’ is no longer a useful description of market prices or sentiment.”
But if manic action was absent back in November, it’s harder to make the same argument today. Since then, the equity market has continued its one-way climb, coaxing animal spirits from the shadows. Last month in Heat Check, we discussed the gambler’s aura that had settled over market. And even in just the past several weeks, enthusiasm has become increasingly unbridled.
The AI ascent is unabated. Consumer products have gone parabolic. Gold has clocked new records. Micro-cap biotech dominates the list of top year-to-date performers. Bitcoin has matched its all-time highs, officially launching “alt-season”, where high-brow cryptocurrencies such as jeo boden or dogwifhat will make you rich, quick. Doge has doubled.
Rather than a lack of enthusiasm, the biggest market worry now seems to be lack of disbelief. If everyone has accepted the new bull run, are its days numbered?
Take this column, even. Somewhere along the way, finger-wagging has ceded ground to dumb punts and growth stocks. Has the titular Last Bear Standing fallen victim to the power of consensus and the allure of the fast buck?
We must get to the bottom of it. Today, we revisit the macro backdrop, sentiment, fundamentals, and monetary policy, and adjust our prognosis for markets. O bubble, where art thou?
Macro
The typical explanation for macroeconomic resilience is that Big Fiscal has balanced monetary tightening. Higher interest rates have had a relatively narrow impact on economic activity as both corporations and households exited the pandemic with brick-house balance sheets. Further, the largest borrower, the federal government, is not particularly sensitive to interest costs and at the same time the Federal Reserve is paying out over $200 billion annually in interest income to the private sector.
I don’t disagree with these broad strokes, but there is more nuance to uncover.